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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Home Country Interest Rates and International Investment in U.S. Bonds
John Ammer
Stijn Claessens
Alexandra M. Tabova
Caleb Wroblewski
Abstract

We analyze how interest rates affect cross-border portfolio investments. Data on U.S. bond holdings by foreign investors from 31 countries for the period 2003 - 2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates. We find that low(er) interest rates, now prevailing in many advanced countries, lead to greater investment in general into the United States, with the effects generally driven by investment in (higher yielding) corporate bonds, rather than in Treasury bonds. In addition to affecting overall investments, lower interest rates at home are associated with a greater weight on corporate bonds, consistent with search- for-yield. The results are economically important and robust to controlling for a number of country-specific macroeconomic and financial conditions as well as to sample restrictions and choices of interest rate. Our findings have important policy implications in that they suggest that low interest rates can lead to shifts in the volume and composition of overseas investments.


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John Ammer & Stijn Claessens & Alexandra M. Tabova & Caleb Wroblewski, Home Country Interest Rates and International Investment in U.S. Bonds, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1231, 22 Jun 2018.
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Keywords: Low interest rates ; Search-for-yield ; Portfolio choice ; Safe and risky assets ; U.S. bonds
DOI: 10.17016/IFDP.2018.1231
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